Rate Cuts Risk Fanning Norway's Sizzling Housing Market

Saleha Mohsin and Julia Gronnevet

February 1, 2015, 6:01 PM ESTUpdated on February 2, 2015, 1:51 AM EST

Another rate cut in Norway could mark the tipping point for its housing market.

As the central bank signals a 50-50 chance it may need to keep lowering rates to tackle a slowdown in western Europe’s biggest oil producer, Norway’s mortgage lenders are cutting rates to lure customers. The country’s biggest bank says the development threatens to stoke an already hot property market.

“The fact that the debt burden is continuing to increase due to the strong house prices is a concern,” said Kjersti Haugland, an analyst at DNB ASA in Oslo. “It might be wise for the central bank not to stimulate the housing market, and thereby debt, by cutting rates further.”

Norway, where private debt has ballooned to 200 percent of disposable incomes, faces what the financial regulator last week called a “self-augmenting spiral” that would push the housing market beyond its breaking point.

Norway’s housing market, which Nobel laureate Robert Shiller all the way back in 2012 said was in a bubble, was inflated by an oil boom that made the nation Scandinavia’s wealthiest and kept unemployment below 4 percent.

Continuous Focus

The flipside of that development is Norwegians’ insatiable appetite for borrowing. They now have more debt than ever before, owing their creditors about twice their disposable incomes, a level that the central bank and financial regulator have said is unsustainable.

House prices rose 8.1 percent in December from a year earlier, according to Real Estate Norway. Prices have risen 85.4 percent nationwide over the past decade, the group says.

Finance Minister Siv Jensen said Jan. 30 that she’s concerned about the housing market. “It’s one of the markets that I’m looking very closely at. We have a continuous focus on that market.”

Norges Bank had kept rates higher than warranted by inflation alone to prevent the housing and credit markets from overheating. But the bank ended a 1,000-day pause in rate moves in December with a surprise cut to 1.25 percent after oil prices collapsed.

To be sure, credit growth among households is lower on average than Norges Bank’s estimates, said Marius Gonsholt Hov, an economist at Svenska Handelsbanken AB.

“While Norges Bank fears a vicious cycle of high house prices and credit growth, that’s not happening right now,” he said.

To continue reading this article you must be a Bloomberg Professional Service Subscriber.